We do not talk about sex or finances. If you are wondering why, click on the link and read the answer. Then come back to this post and learn, why I am breaking the rule.
Equally short, equally true: Glynsky made me.
He threatened to fire me from my unpaid, unofficial position, unless I write something about Bitcoins. Why? I have no clue. My guess, our business magnate intends to move a portion of his vast fortune into this crypto-currency. Or, he already did and wants to use diablog to pump up the price. Your guess is a good as mine.
Now, before I lose my zero income from diablog, before I get some free time, here is a little bit about Bitcoin. No pun intended. If you aren’t interested, ignore this post. If you are, click on “continue reading”.
Let me say one thing first: I do not own bitcoins. Why? The concept wasn’t completely clear to me, when I looked into it in 2010. And I follow Warren Buffet’s rule: Only invest in things you understand. My main concern was, that if my computer can get hacked, my electronic wallet could be stolen. And until I am not able to move the wallet to a USB stick or flash card, I am not using it. (Maybe here is a solution.)
But lets start with what bitcoins are.
It is an electronic finite currency. Finite means, there is a maximum number of bitcoins, which can be available to all. Bitcoins are created by having a computer solve mathematical problems. It is called “mining bitcoins”. Once the computer solved the problem, and a bitcoin is created, the next mathematical problem to solve for the next bitcoin requires more computer power. As computer power is limited, at one point, no more bitcoins will be created. The total supply is capped at 21 million, and every four years the creation rate is halved. In theory, that makes bitcoins inflation proof. Different from government issued currencies, nobody can just print money causing devaluation. Which is happening right now with all major currencies.
Since 2009 – yes, for 5 years already! – every government is printing money like crazy. Because cheap money is supposed to help the economy, or at least exports. And cheap money reduces the government dept slowly. There are Venture Capital investments recorded with negative interest rates. And during the financial crisis of 2008-2011 German government bonds paid no interest either, or had negative interest. Meaning, you had to pay Germany more money, to by its bonds, then they were worth. Not an inflation proof investment.
So Bitcoins are not created by a central government, but by regular people like you and me. Once all possible bitcoins are mined/created, probably over 100 years from now, the value of one bitcoin can only go up.
How do bitcoins compare to other, government currencies?
Like in all other currencies, you have to believe in it. As much as you have to believe that the US Fed gives you something in return for a Dollar, or the Bank of England for a Pound Sterling, etc. There are plenty of currencies, very few people believe in. Or the believers are limited to just one or a few countries. You are not likely to accept payment in Russian Ruble, or Albanian Lek, are you?
That leads to the next comparison, what can you do with bitcoins. Besides trading them, or exchanging them for Canadian or US Dollars, you can buy stuff. For example: The WSJ reports here, that Overstock.com, “has sold more than $1 million of products to bitcoin users since the online retailer began accepting the virtual currency in early January.” At an increasing pace more and more companies are accepting bitcoins as valid currency to pay for goods and services.
So, how do bitcoins compare to other “inflation proof” investments?
Let’s start with the old fashioned gold. Which in itself is utterly useless. First, it has no use except for jewelry. Which is equally useless. Secondly, nobody knows how much gold there is around. Third, the gold price is manipulated by a few people, who play you. So, that is crap. Or pure speculation where the game is rigged.
What about diamonds? Worse than gold. They have no real value. And except for a few South Africans and the Russian state nobody knows, how much are around. Rumor has it, there is a field in Siberia, that has enough diamonds to supply the whole world for a decade. The two biggest miners conspire to keep the price up. Why wouldn’t they? If you want to know, what a diamond is worth, try selling it to a trader. “No one ever got cheated buying his own goods”. If you can sell it at all, and you are lucky, you’ll get 50 cents on a dollar. Small hint, the Oppenheimer family got out of DeBeers. If one of the two the controlling owners leaves the market, shouldn’t you leave too?
Finally, are bitcoins anonymous?
No. There is a general ledger of all bitcoins created. And from there one can trace back to the creator/owner. And as soon as a bitcoin is spent and the goods or service are delivered, the anonymity ends too. Bitcoins are harder to trace than an electronic bank transfer or a credit card transaction. But they are not as anonymous as cash.
Last but not least, there are many other non-government, alternative currencies. And many more crypto-currencies.